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Using Indicators
FSTO – Fast Stochastics
Introduction:
Stochastic Process was invented by Dr. George C. Lane many
years ago under this basic premise: During periods of decrease
daily closes tend to accumulate near the extreme low of the day
and conversely during periods of increase daily closes tend to
accumulate near the extreme highs of the day.
This indicator is designed to show conditions of overbought and
oversold markets. Stochastics are divided into two types regular
Stochastics, often referred to as Fast Stochastics, and Slow
Stochastics. Fast Stochastics are said to be more sensitive to
price changes and can give very greatly in the short-term, hence
the need for Slow Stochastics.
Interpretation:
Stochastics display two lines that move in a vertical scale between
0 and 100 - representing percentiles from 0% to 100%. Think of
the level of Stochastics as where the most current close is within a
specific range. For example, if Stochastics are reading 50%, the
current close is in the middle of the price range for specified
period of time. If Stochastics are reading 100%, the close is at the
high of the range, and 0% represents current close price being at
the low of the range. Of course, because Stochastics are
smoothed this is not exactly true, but should help you visualize the
information being shown. This will also help you to understand
why Stochastics are a counter trend indicator, in that the
underlying principle behind Stochastics is that prices will move
back to the center of the trading range, or the opposite extreme.
When both lines move to an area below 20 on this scale they are
said to be in an oversold zone. Conversely, when both %K and
%D move to above 80 on this same scale they are indicating
overbought. It is this indication of market sentiment that makes
this counter trend indicator useful.
George Lane emphasized that the most important signal
generated by this method was the difference or divergence
between %D and the underlying market price. He said that the
divergence is where %D line makes a group of lower highs while
the market makes a series of higher highs. This would indicate an
overbought condition. The reverse would be true of an oversold
market, with %D making higher lows and prices making lower
lows.
Trade triggers to buy are created when, during an oversold
condition (Stochastics below 20) the slow line, %D is crossed by
the faster moving line, %K.
Track ‘n Trade Pro 4.0 User Manual
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